Introduction
There are many benefits to trading in your car to get a new one but what if you still have a balance on your current auto loan? This is not a rare case and many people are in such a position, but it is very important to know that it is possible to trade in a vehicle with an existing loan on it.
This guide will take you through the process of trading in your car to Automatic Car Credit when you still have money to pay on your car, the steps, factors to consider and the pitfalls to avoid in order to make the process as smooth as possible.
What is the Meaning of Affording Your Car on a Loan?
To begin with, let us take a look at what it means to owe on your car loan before getting into the process. If you have an auto loan, then you are repaying a lender over some time for the car that you borrowed from him. The remaining sum that you need to pay is referred to as your loan balance. When trading in a car with an unpaid balance, two key terms come into play:
- Positive Equity
If the value of your car is higher than the loan balance then you have positive equity. For instance, if your car is worth $12,000 and you have a loan of $8,000 you can use the $4,000 towards the new car.
- Negative Equity
If, for example, your car is worth less than the amount you borrowed, then this is termed as being upside-down or having negative equity. For instance, if you own a car that is worth $10,000, but you have a loan balance of $15,000, then you have negative equity of $5,000. This can make the trade-in process a little difficult but it is not impossible to manage this situation.
How to Trade in Your Car When You Still Owe
Now that you know the terms, let’s look at the steps involved in trading in a car with an existing balance on it.
- Determine Your Car’s Trade-In Value
The first step is to determine your car’s current trade-in value.
- Be honest about your car’s condition when getting a trade-in estimate to avoid surprises at the dealership.
- You can also visit Automatic Car Credit to get a professional appraisal for a more accurate trade-in value.
- Check Your Loan Payoff Amount
Next, you’ll need to find out your loan payoff amount, which is the amount you still owe on your current car loan. You can get this number by contacting your lender or checking your loan account online. Keep in mind that the payoff amount might include any early repayment penalties or additional fees.
- Calculate Your Equity
With both your car’s trade-in value and loan payoff amount in hand, you can calculate your equity.
- If your car’s trade-in value is higher than your loan payoff amount, you have positive equity.
- If your car’s trade-in value is lower than what you owe, you have negative equity.
Plan your trade-in strategy.
How to Trade in a Car with Positive Equity
If you have positive equity, trading in your car is relatively straightforward:
- Negotiate the Trade-In Offer:
Once you’ve had your car appraised, you can use the positive equity as a down payment toward your new vehicle. For example, if you have $3,000 in equity, you can apply it to lower the price of your next car or use it to reduce your loan amount.
- Pay Off the Loan:
The dealership will typically handle paying off your old loan, and you’ll just need to sign the necessary paperwork. Once the dealership pays off your loan balance, they will apply any remaining equity toward your new car purchase.
- Finalizing the Purchase:
After your loan is paid off, your positive equity will be subtracted from the price of the new car, reducing your monthly payments or total loan amount.
How to Trade in a Car with Negative Equity
If you have negative equity, the process becomes a bit more complex, but it’s still manageable. Here’s how to navigate the trade-in with negative equity:
- Roll the Negative Equity into Your New Loan
In most cases, you can roll your negative equity into the loan for your new car. For example, if you owe $2,000 more on your current car than it’s worth, the dealership may agree to add that $2,000 to your new car loan.
- Keep in mind that this will increase your loan balance, meaning you’ll owe more on your new car than its actual value. This option is common but can leave you upside-down on your new car loan.
- Pay Off the Negative Equity Out of Pocket
Another option is to pay off the negative equity in cash when you trade in your car. While it may be a financial stretch, paying the difference upfront will help you avoid rolling the negative equity into your new loan and starting off with positive equity.
- Think about getting a Lease or a Cheaper Car
If rolling negative equity into a new loan is not interesting, then leasing a car is the next best thing. A lease normally has lower monthly installments and might enable one to handle the negative equity more easily. Instead, you could opt for a cheaper car, this way, even though the negative equity will be taken, the loan balance will not be as high.
What You Should Know Before Trading in a Car with an Outstanding Loan
- Effects On Your Monthly Installments
Negotiating a new loan whereby negative equity is rolled over will definitely lead to higher monthly installments. You have to ensure that the new loan payment is well understood and affordable depending on the new debt you are likely to incur.
- Interest rates and loan terms
If you are trading in a car for which you still owe money, you should compare the interest rate and the remaining loan terms of the dealership. When interest rates rise, the cost of borrowing will be higher and when loan terms are stretched out, one is likely to be paying for the new car for a very long time.
At Automatic Car Credit, we help borrowers to understand ways of financing that would be affordable depending on the negative equity or positive equity that a person is experiencing.
- Vehicle Depreciation
Cars normally lose their value rapidly thus when you transfer negative equity to another loan, you can end up owing more than the value of the car within a short time. One should also consider the impact of roll over of negative equity on the vehicle’s depreciation.
Bottom Line
It may seem like a daunting task to trade in a car when one still has some balance to clear on the car but it is actually very feasible if one has the right information and or advice on the matter. Regardless of whether you have positive or negative equity, there are ways of changing your car without having to worry about the outstanding balance.
Here at Automatic Car Credit, we do not want the process to be complicated and we have different payment plans to fit your needs. If you want to trade in with positive equity, struggling with negative equity, or getting a new loan, our team will assist you to get behind the wheel of a new car.